Corporate bonds are essentially debt instruments issued by a company to raise funds towards working capital or meeting capital expenditure plans.
If you are buying corporate bonds, you are just lending money to a company, in lieu of which you will receive interest from it periodically for a fixed period of time. At the end of the maturity period, you get back the principal amount along with the interest accrued on it.
For example, you buy a five-year corporate bond with a face value of ₹100 at an annual interest rate of 10%. Then the company will pay you ₹10 every year for 5 years. You will be able to redeem the bond i.e. ₹100 + ₹10 accrued interest at the end of 5 years.
Both public and private companies can issue corporate bonds in India. A company which is a part of a multinational group, but is incorporated in India, can also issue corporate bonds. However, a company incorporated outside India cannot issue corporate bonds in the country.
Why corporate bonds?
Corporate bonds look attractive as they give investors regular inflation-beating returns. A corporate bond may offer a fixed or floating rate of interest. Accordingly, you may earn a fixed or varying amount of interest periodically. A fixed rate bond will pay you a fixed amount periodically as per the interest rate set out when the bonds were issued. Such fixed interest payments are also called coupon payments.
A floating rate bond, meanwhile, has its interest rate pegged to a benchmark rate (or may be a government bond). As the benchmark rate changes, the interest rate on the bond varies accordingly.
It is important to note that a fixed interest rate bond may earn you less than a floating rate bond due to lesser risk involved.
Due to stable returns, corporate bonds are considered less risky than equity shares. Though you may not enjoy any ownership in the company like when you buy equity, your capital is still protected from any massive fluctuation in the stock market.
Moreover, it is easier to evaluate bonds due to the credit rating attached to them. Rating agencies take into account factors like financial stability of the company, current debt, and growth potential before they assign ratings to these bonds.
How can you invest in such bonds?
The company planning to raise funds through corporate bonds generally offers either a public issue or a private placement. A public issue means an offer will be made to the retail investors to subscribe to the bonds within a specific period, whereas a private placement is usually for institutional investors.
In a public issue, the company needs to issue a prospectus before selling the bonds. A prospectus is a document containing details about the company and the bonds to be issued (coupon rate, maturity date and interest payment schedule). After the public issue, these bonds are listed on the stock exchanges. Such types of bonds are called listed bonds.
In case of listed bonds, an investor can buy the bonds through either the public offering by the company or through exchanges. The public offering by the company is referred to as primary market and the trading of the shares subsequently through the exchange is called secondary market.
Buying bonds through the public offering means buying the bonds directly from the company, whereas buying the bonds through the secondary market means buying them from sellers who wish to sell the bonds held by them.
All you need to invest in corporate bonds is a trading account from a brokerage firm, bond traders or brokers.